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18 April 2015

It's been fascinating to watch the Russian economy adjust to sharply lower oil prices. With a little help from the central bank, the country's recession might not be as bad as previously thought.After an initial period in which the ruble plummeted and inflation surged -- with food prices up 15.4 percent from a year earlier in December -- the Russian central bank's response is turning things around. A sharp increase in short-term interest rates, currently at 14 percent, has stabilized the ruble and might even be getting consumer prices under control.The episode has taken a toll on Russian living standards. In the first quarter of 2015, inflation-adjusted incomes were down 1.4 percent from a year earlier. Retail sales dropped 6.7 percent -- and individual stores, such as the M Video electronics chain, reported even steeper declines. Imports were particularly hard hit, thanks to the impaired buying power of the ruble: In January and February, they were down 37.9 percent from a year earlier. The government's finances haven't fared well, either. Standard & Poor's predicted Friday that Russia's fiscal deficit will rise to 4.4 percent this year, higher than the 3.7 percent the government predicts.Still, there are signs that a cheaper ruble might be helping some Russian producers compete with imports. True, industrial production was down 14.6 percent in the first quarter from a year earlier, with the garment industry -- which depends heavily on imported inputs -- taking the steepest plunge. Yet Russian food production was up 3.5 percent, suggesting that import substitution might not be just President Vladimir Putin's pipe dream.

Those sanctions are working so well.

It's gotten to the point that the Russian Central Bank governor has suggested that they will be lowering interest rates to keep the Ruble from appreciating to much.

One important thing to note here is that Russia has some advantages over other sanctions targets, specifically a captive market for natural gas in Europe, and a central bank that has dealt with these problems very competently.

I would argue that much of the reason that the bank has handled this so well is because of their relative lack of independence from the Russian government.

Because they have not been allowed to indulge in free market navel-gazing they have responded aggressively to Russia's crisis.